Will capital flow clampdown impact here?

China’s capital outflow restrictions have created a question mark over whether the rapidly increasing pace of Chinese investment in New Zealand will continue.

Firms wishing to make overseas capital payments over US$5 million must first seek permission from central government. The upshot is Chinese foreign direct investment may be set to falter in 2017.

According to China Ministry of Commerce figures, the first two months of 2017 saw overall non-financial overseas direct investment by Chinese firms and investors fall 52.8 per cent year-on-year. The trend was even more pronounced in outbound property investment, which fell 84.9 per cent.

Potentially the most impactful policy change for New Zealand came on December 31, 2016, when Safe issued an instruction that Chinese citizens wishing to purchase foreign currency must fill out documentation specifying the purpose of their purchase and sign a pledge the funds won’t be used to purchase offshore property.

Chinese media have reported that a new regulation — which will more clearly define which outbound investments are prohibited — will be announced later this year.

According to China Daily, “the new rule will map out an overall structure governing outbound investments from the State level, combining and making further clarification of current rules in areas such as review procedures, tax policies and the allowed amount for capital flows.”

It will also make clear the areas to be encouraged and forbidden.

President Xi Jinping’s anticorruption campaign has already resulted in measures by banks and other financial institutions to clamp down on offshore money laundering. But the focus on capital outflows has increased noticeably since the Chinese sharemarket turbulence of 2015.

“More recently there have been reports the Chinese authorities have been taking a much less encouraging attitude to Chinese outward FDI,” says Associate Professor Robert Scollay of the University of Auckland. “Whether this reflects a concern about what would happen if a significant proportion of these investments were to turn bad, or a more general concern to limit capital outflows, perhaps in response to increased international uncertainty, is an open question.”

According to Beijing-based Caixin Global, “China’s top foreign-exchange regulator said outbound direct investment (ODI) surged rapidly in 2016, but the central Government considered some of those investments ‘irrational’ and ‘abnormal’.”

As well as new currency exchange documentation for individuals, firms wishing to make overseas capital payments over US$5 million must first seek permission from central Government. Control over the foreign transfers of individuals and families have also increased, with regulations forcing Chinese bankcards issued with Visa or Mastercard to be replaced with the state equivalent, Union Pay, on expiry. This will limit withdrawals from overseas ATMs to 100,000 yuan (around US$14,500) per card. The quota of foreign currency citizens are allowed to buy from domestic banks has remained unchanged at US$50,000 per year.

Brakes have also been applied to the Qualified Domestic Institutional Investor programme, a system to facilitate investment by Chinese citizens and firms in overseas financial markets, according to Reuters.

In December 2016, the South China Morning Post reported the People’s Bank of China would not approve foreign real estate investment deals worth more than US$1 billion.

Though the US$1 billion real estate ceiling is unlikely to impact majorly on New Zealand real estate investments, the Chinese Government clearly wants to plug the holes that have made capital restrictions increasingly porous over the past decade.

If Chinese investors expect more restrictions in 2017 they may be more cautious. If the US$50,000 quota could be reduced in the future, it would make loan repayments for property investments less certain. “Any effect on New Zealand would of course be fallout from the more general trend, rather than the result of any New Zealandspecific policy change,” says Scollay.

Even if this does translate to lower Chinese investment in New Zealand, the ultimate impact on property prices is debatable.

Land Information NZ figures show just 4 per cent of Auckland property buyers in the last quarter of 2016 were foreign tax residents. Chinese buyers were by far the largest, making up 294 of the 519 total. The next highest was Australia, with 39 buyers.

There is also the impact of the Reserve Bank’s increased LVR ratio of 30 per cent for investment properties as well as self-imposed policies by banks such as Westpac and ANZ to consider. A $1 million investment property would now require a $300,000 deposit.

This may be more difficult to find in light of the US$50,000 quota and attempts to restrict other channels through which citizens might convert currency. Ongoing interest payments present similar challenges.

The pooling of quota funds is also off the table. Where, previously, in- vestors could accumulate more than their individual US$50,000 by using funds from a friend or associate’s quota, this is now more closely regulated and prohibited.

According to a Commonwealth Bank of Australia economic update, “tighter FX controls over individual FX purchases could save China about US$50 billion of FX reserves in 2017, or 12 per cent of the total capital outflows over the past year.”

The CBA update reports that SAFE has suspended approving new foreign real-estate investments since late November 2016. “This policy has reduced the number of Chinese buyers in overseas commercial and industrial building markets, raising concerns, according to industry liaison,” said CBA. “While the tightening of FX purchases in China could see less Chinese buyers in overseas housing markets initially, the impact is unlikely to last given the strong structural demand by Chinese people to diversify their assets.”

Chinese banks remain confident that healthy levels of Chinese investment in New Zealand will continue.

“New Zealand remains an attractive investment and migration destination,” says Lloyd Cartwright, Deputy CEO of the China Construction Bank in New Zealand. “We envisage this will continue despite the perception of increased enforcement of capital controls in China.”

He says Chinese enthusiasm for investment here has been strong since CCB NZ was granted its licence in 2014, and there hasn’t been a noticeable shift since the policy changes.

“We have witnessed an ongoing inbound appetite for New Zealand investment both at a personal and business level. This is continuing in 2017.”